Tuesday, April 8, 2008

Maria Bartiromo and Steve Liesman question the former chairman. Turns out his responses are as confusing as ever. He gets the chance to respond to two major points of criticism of his tenure at the helm of the Federal Reserve. First in his judgment adjustable rate mortgages were not the driving force of the astronomical rise in home prices, but rather low long term rates which the Fed had no control over. He concludes that "if ARMs were not available purchases would still have occurred but financed with slightly higher, more costly rates".

Liesman asked him if the low interest rates were intended to spur the housing market. Here is what he had to say.

The reason to lower rates was not to spur the housing market, they were already spurred because long term rates were low. This was essentially to create liquidity in the system, to confront which we perceived to be an increasingly corrosive probability of deflation, very much what existed in Japan at that time. Even though our forecast was that we would not go into a strong deflation the consequences were so great, that we decided that we needed to take out insurance against a below 50/50 percent probability of a significant deflation.

Here you go! He admits that even the best forecaster, and betya the self-righteous Greenspan sees himself on top of this pyramid, can be right only six times out of ten the most. Yet he does not hesitate to take out insurance against a very shaky forecast (below 50/50 percent). Turns out he was wrong lowering interest rates. It became a habit under Greenspan to act preemptively and prevent recessions at any cost, now continued by his follower Bernanke. I find it schizophrenic from Greenspan to admit that he has no control over long term rates or that he is not responsible for equity performance in someones 401k but on the other hand believes that he can act on a hunch and micromanage a 13 trillion dollar economy. That goes to show the delusion of grandeur and arrogance of this man. After watching this interview I am more convinced than ever that Greenspan was a huge failure. The greatest trick the devil ever played was to convince everybody that he did not exist. The greatest trick Greenspan ever played was to convince Wall Street that he was a brilliant, infallible economist.